Three PMI Surprises, but France Takes the Show

There have been three flash PMI reports today, and each was surprising. China and Germany surprised on the downside while the French surprise was on the upside.

HSBC’s flash read on China’s manufacturing sector weakened for the fifth consecutive month. The flash March reading of 48.1 compares with the final February of 48.5. The forward looking new orders component fell for the fourth month and is now back to levels seen last July. Output was at 18-month lows. If there was a bright spot, it was the tick up in export orders.

Meanwhile, helped by a stronger yuan fix by the PBOC, CNY posted its biggest rise in around 2 years (0.58%), in Shanghai. . The yuan was fixed 0.04% stronger o CNY6.1452. Comments by the Vice Finance Minister apparently signaled some relaxation of pressure when he sad the potential for yuan depreciation was not large. This was reinforced by the continued rise in money market rates. The key 7-day repo rate for as much as 12 bp in today’s local session after rising almost 100 bp last week.

Germany’s flash PMI reading was strong, just not as strong as it has been, or as the market expected. The manufacturing PMI flash of 53.8 compares with the 54.8 reading in February. It is the lowest level in four months. The services flash PMI fell to 54 from 55.9 and is the lowest in two months. The composite fell to 55.0 from 56.4.

The German locomotive continues to move ahead but simply not an accelerating pace. This has been hinted at in the ZEW survey and will likely be picked up in the IFO survey due out tomorrow. The French data was spectacular. The manufacturing and service flash reading both jumped back above the 50 level (at 51.9 and 51.4 respectively). This is the first time since July 2011 that the manufacturing reading is above 50. The flash service sector reading is the highest since January 2012.

It does not take much of the sting out of the weekend municipal elections that saw the Socialists trounced, but assuming the preliminary data is confirmed in the final releases next week, the divergence between the euro area’s two largest economies may have peaked. French asset markets have not been rewarded in response. The CAC-40, like the DAX, is off about 0.8%, and 10-year bond yields are slightly firmer. The flash reading for the euro area as a whole slipped to 53.0 from 53.2 in February for the manufacturing sector and 52.4 from 53.6 in services. The composite edged down to 53.2 from 53.3. The key issue is the impact on the ECB at next week’s meeting. Today’s report is unlikely to change any one’s mind.

The key challenges of the ECB, the risk of deflation, given the continued strength of the euro and weaker commodity prices, the volatility of EONIA, the weak money supply growth and contraction in lending, remain in place. Money supply and lending data are due out on March 27 and, arguably, are more important for the ECB than today’s data.

In the North American session today, we don’t put much stock in the Markit PMI as a market mover. Recall that in February it jumped to 51.7 from 53.7, which was a record high for this relatively new time series. The longer-running ISM ticked up, but at 53.2 remained below the three and six month averages (53.7 and 55.1, respectively). We put more credence on the ISM for insight into GDP dynamics than the PMI.

The other potential highlight is Fed Governor Stein speaking today. In light of last week’s FOMC meeting and the sharp backing up of short-term US rates, one may suspect Fed officials beginning to protest. However, before the weekend, Bullard had an opportunity and instead stuck with Yellen’s six-month statement as a reflection of surveys. Stein’s topic is community development and so this may not be the most likely forum.

The US dollar is mostly firmer. The euro had initially rallied to almost $1.3830 on the back of the French PMI, but sold off even sharper on the German data and composite readings. The euro briefly slipped through the pre-weekend low, but has remained above the low seen in the immediate response to the FOMC last week near $1.3750. Additional support is seen in near $1.3720. Note that the five day average is poised to cross below the 20-day average for the first time sine February 11. For its part, sterling is trading at new six-week lows. A close below $1.6470 today would be a bearish development.

The dollar is testing last week’s high against the yen just below JPY102.70. A push above it could excite short-term operators for a move toward JPY103.20-40. We note that the euro reversed lower from after re-testing the JPY142 area that repeatedly held last week. Lastly, the dollar-bloc itself is mixed. The Aussie is trying to build a foothold above $0.9100, while the Canadian and New Zealand dollars are lower. The Aussie is extending last week’s recovery against the New Zealand dollar and has moved above its 20-day moving average for the first time in a month.

Marc Chandler joined Brown Brothers Harriman in October 2005 as the global head of currency strategy. Previously he was the chief currency strategist for HSBC Bank USA and Mellon Bank. In addition to frequently providing insight into the developments of the day to newspapers and news wires, Chandler's essays have been published in the Financial Times, Barron's, Euromoney, Corporate Finance, and Foreign Affairs. Marc appears often on business television and is a regular guest on CNBC and writes a blog called Marc to Market. Follow him on twitter.